Hafeez Pasha
Pakistan’s four provincial governments, together with the federal government, account for a substantial share of the country’s consolidated public expenditure. In 2025-26, total public expenditure stood at Rs23,087 billion, with the provinces accounting for Rs8,627 billion of that total. Excluding federal debt servicing, which alone amounted to Rs6,947 billion, the provinces’ share of the actual cost of delivering services nationally rises to 53.4 percent. Given that education, health, irrigation, roads, water supply, and sanitation are all primarily provincial responsibilities, the fiscal performance of these governments carries real weight for service delivery.
The year was significant for another reason too: the consolidated budget deficit of the federal and provincial governments combined fell to a record low of 2.6 percent of GDP, down sharply from 5.4 percent the previous year. The question worth asking is how much of that improvement the provinces themselves actually drove.
Revenue Performance
Collectively, the four provinces posted a solid year in tax collection, with own tax revenues rising 23.5 percent, well ahead of the 10 percent growth seen in federal tax revenues. As a result, the provincial tax-to-GDP ratio climbed to nearly 1 percent, up from about 0.8 percent the year before.
That said, the provincial tax base remains heavily reliant on a single source: the sales tax on services, which accounted for more than 64 percent of total provincial tax revenue in 2025-26. Other potentially significant and progressive revenue streams, including agricultural income tax, the capital value tax on property, and urban immovable property tax, remain largely untapped. IMF programme projections suggest provincial tax revenues should reach 1.4 percent of GDP in 2026-27, a shift that would meaningfully support expanded and improved service delivery.
Non-tax revenue remains comparatively modest at Rs471 billion, though it grew by more than 50 percent across the four provinces combined, a notable jump. Significant untapped potential still exists in areas like irrigation charges and highway tolls.
Overall, provincial reliance on federal NFC transfers, grants, and loans eased slightly during the year, with the share of federal transfers in provincial revenue falling from 86 percent to just under 84 percent, a trend that will need to continue.
Spending Trends
On the spending side, the share of development expenditure in total provincial spending rose from 27.5 percent to over 31 percent. Current expenditure growth was held below 7 percent, while development spending rose by almost 23 percent.
Together, faster revenue growth and restrained current spending produced a striking result: the combined cash surplus of the four provinces jumped more than 57 percent, reaching 1.3 percent of GDP in 2025-26, up from 0.8 percent the previous year. That improvement contributed meaningfully to the reduction in the consolidated budget deficit, though the bulk of the overall deficit reduction still came from a sharp decline in the federal deficit itself.
Province-by-Province Performance
Punjab’s standout achievement was a dramatic jump in its cash surplus, from Rs348 billion in 2024-25 to Rs914 billion in 2025-26, a growth rate exceeding 162 percent. That was driven primarily by holding current expenditure growth to 8 percent while growing own revenues by 35 percent. Punjab alone generated roughly 63 percent of the entire provincial cash surplus nationwide.
Sindh posted a 25 percent increase in own revenues and now holds the highest level of provincial tax revenue of any province, at Rs593 billion, ahead of Punjab’s Rs496 billion. Current expenditure growth was limited to just 6 percent, freeing up funds for development spending, which rose 28 percent. Sindh’s overall cash surplus grew by 24 percent.
Khyber Pakhtunkhwa’s performance was comparatively weak. Provincial tax revenue actually declined by 1 percent, while federal grants and loans fell by an even steeper 11 percent, and NFC transfers grew by only 2 percent, notably below the 12 percent national average, a discrepancy the analysis doesn’t fully explain. The province did restrict current expenditure growth to just 2 percent while boosting development spending by 35 percent, but its overall cash surplus still fell by 7 percent.
Balochistan faced a similar dynamic, with federal grants and loans dropping sharply by 32 percent and NFC transfers rising just 2 percent. Own revenues and both current and development spending grew moderately, but the province’s cash surplus still contracted sharply, by 82 percent.
Taken together, the year’s results point to a widening gap between the fiscal performance of the two larger provinces, Punjab and Sindh, and the two smaller ones, Khyber Pakhtunkhwa and Balochistan, a trend that risks deepening regional inequality across the country.
Implications for Creating More Provinces
On the question of creating additional provincial governments, a few figures stand out. Given how labour-intensive provincial services already are, employee-related expenses are already substantial, reaching Rs2,312 billion in 2025-26, more than double the federal government’s Rs1,033 billion, a point rarely highlighted in the broader debate.
Employee retirement benefits paid out by the four provinces combined total Rs1,141 billion, actually exceeding the federal government’s pension bill of Rs1,001 billion.
The implication is that creating more provincial governments risks a sharp escalation in current expenditure tied to running government operations, and eventually in pension liabilities as well. That, in turn, raises the risk of squeezing national development spending and reversing the recent progress made in narrowing the consolidated budget deficit.
